Prescription for decline

Lost in all the uproar over the U.S. Supreme Court's June 28 "Obamacare" ruling was the crucial link between health care reform and the issue voters care most about: the economy. America's current health care "system" isn't just an ungainly, costly, and unjust mess. It also undercuts the United States' ability to compete and win in world markets.

Amid the debate over "American decline," this connection deserves a lot more attention than it's getting. To revive U.S. international competitiveness, the country clearly needs to rein in runaway health care costs. But it has to be done in the right way - not just by clamping down on spending but also by boosting medical innovation and productivity.

Now that the court has upheld the individual mandate requiring most citizens to obtain health insurance, U.S. policymakers would ideally turn to the challenge of medical cost containment. This is unlikely to happen, however, because Republicans have vowed to make the repeal of the Affordable Care Act a centerpiece of their 2012 campaign message. Republican presidential candidate Mitt Romney dutifully promised Thursday to kill the "bad law," even though it's conceptually identical to the Massachusetts health plan he backed while governor of that state.

Conservative ideologues want to make the mandate and the substantial costs of expanding coverage to 33 million Americans a parable about the dangers of an overreaching and intrusive federal government. The administration ought to counter with a positive narrative about how bending down the health cost curve can help reverse America's competitive slide and spark an economic comeback.

Not only does the United States have the world's most expensive health care system but medical inflation routinely outpaces economic growth. Because most workers get their health insurance coverage from their employers, this saddles firms with rising labor costs even as the United States seeks to slow and reverse the hemorrhaging of manufacturing jobs overseas. Fear of losing coverage inhibits worker mobility and makes the labor market less flexible. Meanwhile, employment in the health care sector keeps growing without producing commensurate improvements in health outcomes - a classic definition of low productivity.

Federal and state government budgets, meanwhile, are groaning under the growing burden of paying for health care. Many states have seen Medicaid spending for the poor displace education as their top spending item. And no one doubts that the mushrooming growth of federal health spending is the country's top fiscal challenge.

The numbers are astonishing: Federal health spending in 2012 will consume 4.9 percent of GDP, or about a fifth of the federal budget ($750 billion). The Congressional Budget Office (CBO) estimates conservatively that spending, driven by a combination of medical inflation and the baby boomers' retirement, will grow to 6.7 percent of GDP ($1.6 trillion) by 2022 and will hit 11 percent by 2050. Reducing that rate of growth is the key to stabilizing the national debt.

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Less visible but no less pernicious is what economists call the "crowding out" effect of health-spending growth. Back in the 1970s, according to former CBO chief Alice Rivlin, such "mandatory" spending claimed only about one-tenth of the federal budget; now it adds up to 55 percent. This relentless squeeze on discretionary spending means that Washington has less money to invest in the foundations of future economic growth and competitiveness. That means less money for infrastructure, basic science, the development of breakthrough technologies, and better schools and occupational training - not to mention social support for poor families and children. If the United States can't offer world-class infrastructure and highly skilled and motivated workers, businesses will invest their money elsewhere.

Amid growing concerns about social immobility and inequality, Americans should also take a closer look at the distributional effects of health costs. In short, soaring costs have slowed wage growth and thrown low-wage workers out of work.

As Steven Nyce and Sylvester Schieber documented in a recent Progressive Policy Institute report, medical cost inflation over the last three decades has been a triple whammy for Americans: It has depressed wage growth, increased unemployment among low-wage workers, and aggravated economic inequality. Wages have gone down because employers have shifted compensation toward health-care premiums and rising health costs have priced low-wage workers out of labor markets. "If employers are forced to absorb health cost increases that exceed the added productivity that workers bring to the table, they will stop hiring," write Nyce and Schieber.

For all these reasons, the president should work to beef up the Affordable Care Act's exceedingly modest cost-containment features. U.S. companies and workers shouldn't have to wait a decade for experiments with new payment systems to give them relief from high health costs. And the administration should rethink one key provision of the law: a board that would limit Medicare payments to providers if Medicare costs rose faster than expected. If those payments are simply cut off, many providers will find it easier to forego productivity-enhancing investments than shed workers. Providing higher-value medical care more cost-effectively will take more innovation and more investment in technology, not less.

The countries the United States will compete with in the next century understand the intricate interactions between their health care systems and their ability to perform in global markets. It's time U.S. leaders did too.

Will Marshall is president and founder of the Progressive Policy Institute.

© 2012, Foreign Policy